This Warning Signal Just Flashed Ahead of Netflix's Earnings -- Here's What It Means for the Stock

In the days leading up to Netflix's 2026 second-quarter earnings report on July 16, an early warning sign emerged. On July 9, The Wall Street Journal reported that declining subscriber engagement had become a frequent topic of discussion among Netflix executives. When the earnings results were released, the metrics largely met expectations, with Netflix beating forecasts for earnings per share but slightly missing for revenue, according to CNBC projections.

However, Netflix announced it would reduce the frequency of its What We Watch report, which offers insights into viewing times and subscriber engagement, from twice a year to annually starting in Q1 2027. This move resulted in less consistent data on how shows and movies were performing. Investor response to the earnings report showed disappointment; the stock closed at $74.35 on July 16 but dropped 7.2% to $68.95 the following day.

Ahead of Netflix's third-quarter earnings report scheduled for October 20, there is another warning sign. According to a memo obtained by CNBC, Netflix plans to lay off 6% of its workforce, approximately 1,000 workers. Netflix co-CEOs Ted Sarandos and Greg Peters stated that the company needs to prioritize its people and resources discipline.

The memo also noted that Netflix remains on track to deliver its full-year forecast, but this may not necessarily mean exceeding original forecasts. Sarandos acknowledged that Netflix is not growing as fast as desired and is working to accelerate this growth, but there are headwinds affecting the projected number. Despite remaining optimistic about Netflix's long-term prospects, including opportunities for subscriber and revenue growth through live sports, video podcasts, and its gaming division, the short-term outlook does not appear promising.

The 24.7% stock price loss thus far in 2026 makes sitting on the sidelines a more comfortable position. The next earnings report is unlikely to provide any catalysts to reverse the decline, so waiting for progress in subscriber engagement, meaningful revenue growth, and an increase in subscribers and revenue from its new ventures before investing is advised.